Question

1. the larger the MPC, the

a) larger the marginal propensity to save

b) higher the income level of the economy

c) smaller the change in income derived from a given change in government spending

d) larger the multipler

2. With respect to the AE= output model, if aggregate expenditures (aggregate demand) is $28 trillion and aggregate output is $27.7 trillion

a. business will accumulte inventories and output will decline

b. inventory will be depleted leading to an increase in production and lower unemployment

c. inflation will be a problem if the full employment capacity of the economy exceeds $10.3 trillon

d. both b and c are correct

3. assume the spending multipler is equal to 5, then a $1 initial increase in investment spending will lead to a

a) .04 percent increase to real GDP

b) 5 % decrease in real GDP

c) 5 % increase in real GDp

d) $5 increase in real GDP

e) $5 decreeae in real GDP

4. Assume that investment increase by $7 million. This will increase equilibrium output (real GDP) by

a) more than $7 million

b) less than $7 million

c) between $6.5 and $7.5 million

d) exactly $7 million

Answer 1

Ans1. Part D) larger the multiplier

The higher the MPC, the higher the multiplier and vice versa. The relationship between the multiplier and the propensity to consume is infinite multiplier implies that MPC is equal to one and the entire increment of income is spent on consumption.

Ans 2. Part B. Inventory will be depleted leading to production and lower unemployment.

Ans 3. Part A. 0.04 percent increase in real GDP

multiplier of spending is calculated as = 1/MPS

5= 1 / MPS gives MPS =.20 which implies 5/.20 =.04

Ans 4. Part C) This will increase equilibrium output (real GDP) between $6.5 and $7.5 million